Dangerous Business Expansion

Jesús Díaz Barrientos is an accomplished finance executive and author based in the Greater Madrid Metropolitan Area. He currently serves as the Head of Finance for DO & CO Spain, a subsidiary of the multinational DO & CO AG company. With over two decades of experience working at senior levels in finance departments and managing companies, Díaz Barrientos has played a key role in building businesses from the finance and operations domains. His expertise spans across multiple industries including financial services, retail, healthcare, IT, technology, industrial and audiovisual sectors. 

According to a study by Startup Genome, 74% of startups fail to expand. Why does this happen? Simply put, they fail because they try to expand too fast. Expansion itself is difficult to manage and we usually find companies with inefficient structures at the end of their expansion process (organic or inorganic), with the aggravating factor that they have not obtained the budgeted sales and end up dragging their central companies into bankruptcy proceedings (dying due to lack of cash because they cannot afford the payments due to the level of stress to which they have subjected the companies). 

The great Charlie Munger said in one of his many brilliant reflections, with that touch of humour that characterized him, that “Knowing what you don't know is more useful than being brilliant”, when we embark on an expansion, what we do not know and have not previously worked on, will be directly proportional to a high level of stress and inefficiency that we will have to manage quickly, to cushion the problems (usually accompanied by hidden costs) that will always appear when scaling a business. We should be aware before we start that the process will be tedious, that we will always make mistakes and that the most important thing of all is that we have to learn from them, with a red line that we cannot cross, which is that we will always safeguard the limits that we have set ourselves so as not to put the company into debt at a point of no return that would lead to bankruptcy. 

We have endless literature on how to manage businesses and the usefulness of doing PESTEL or SWOT analysis, TAM SAM SOM, etc... Market research is essential to identify the potential demand, size and characteristics of your target market, as well as the best strategies to enter and compete in it since expanding to a new location or buying a company to grow inorganically means that we have very studied that our product or service meets the needs and preferences of the customer, something that sounds very basic but that many companies lose in the process. 

From this point the rest of the strategy must come chained, the realization of good planning and execution in an effective way, with the right team, skills and appropriate systems for control that are closely linked in what in my opinion is the primary control (Cash Flow) that will give us the alarm signal if we are not in the right line, which is the lack of capital. 

As I explained in my previous article “Strategic Cash Flow”, we must keep in mind that in the finance function “we align the company's strategy to ensure that growth is sustainable and financially efficient” and expansions typically require a significant amount of upfront investment, such as hiring new personnel, purchasing new equipment, leasing new facilities, or developing new products. However, the return on investment may not be immediate or guaranteed, and we may face increased expenses, such as taxes, utilities, marketing, or inventory. Therefore, we must have sufficient capital and cash flow to cover its expansion costs and sustain its operations until it generates sufficient revenue without impairing the company’s activity in its other locations. 

As a result of this control, the most important thing is to detect in time when the project is not working, to know how to stop before compromising the viability of the company, even if significant investments have been made.